During the 2021 Kansas Legislative Session, our lobbyists, Paul Davis and Whitney B Damron, drafted legislation on behalf of the Self Storage Association to make four changes to the Self Storage Act. They successfully passed the bill and it was signed into law by Governor Laura Kelly, with an effective date of July 1, 2021.
Key provisions of the bill and changes to the Act are as follows:
1. Make damage loss limitations in contract enforceable in law.
Section 1. (b) will allow contractual limitations on the value of stored items to be enforceable in court under contract law. Some jurisdictions (e.g., courts) have not adhered to these limitations absent statutory authority. A self-storage operator may have good reason to limit the value of items stored in their facility, including limitations on their own insurance coverage and an interest in not having certain high-value items stored onsite that make theft difficult to discourage (e.g., classic vehicles, firearms, gold coins, rare art, etc.).
This or similar language allowing for damage loss limitations in contract has been approved in a majority of states, including MO, OK, CO and NE.
2. Third party notification of potential default in contractual obligations.
Many Self-storage operators allow for the designation of a third-party contact for notification in case of breach of contract or other times notification of a renter is required. This language would make that offering a mandatory part of the rental agreement. The third party so designated would not have access to the contents of the rental unit pr proceeds from a sale unless expressly allowed under the rental agreement.
This requirement is pro-consumer new language and generally not a part of statutory requirements found in other states.
3. Allow auctions to be conducted in-person and/or online.
Section 2. allows for auctions to be conducted online or in person. National trends, even before Covid-19 restrictions were imposed, are for these kinds of auctions to be conducted in both in-person and online formats. Online sales allow for greater participation in an auction, which ultimately benefits both the self-storage operator and the renter in default, as the likelihood of increased recovery exists with more potential bidders partaking in an auction.
This or similar language allowing for online auctions has been approved in a majority of states, including MO, OK, CO and NE.
4. Public Notice of Sale; Auction.
Under current law, the notice of a sale of the time, place, and terms of the sale must be placed in a newspaper of general circulation in the jurisdiction where the sale is to be held. Our proposal would amend Section 2. (b)(3) to allow for a sale to also be conducted “in any other commercially reasonable manner.”
During hearings on a similar bill in 2020, questions were raised as to what a “commercially reasonable manner” is defined to be.
Our proposal clarifies this issue as follows:
If less than three independent bidders attend the sale in person or view the sale online at the time and place advertised, the manner of advertising the sale shall not be considered to have been commercially reasonable and the sale shall be canceled, rescheduled, and readvertised. Further notice to the occupant shall not be required.
Official public notices in newspapers with expensive print subscriptions, online paywalls and diminishing subscribers is simply not the way the public is typically notified of these sales. Most self- storage operators have a list of interested bidders; they publish on their own website and/or post notifications on self-storage trade websites that generate public interest. Notices placed on self-storage operator websites and trade websites can be viewed for free and a readily available from search engines.
Newspaper ads are simply not where people find out about self-storage auctions anymore. They rely upon social media (Facebook, self-storage-related auction websites, self-storage operator websites and other online media)
This or similar language allowing for online notification has been approved in 17 states, including CO and NE. In addition, five states have reduced publication requirements and three states have no publication requirements whatsoever.
With the COVID-19 situation continuing to evolve across our nation and the world, I want share some thoughts and observations with storage owners across Kansas. Hopefully, we are keeping a positive attitude and looking to come out of this crisis stronger than ever.
As the highest priority is the health and safety of our employees and our customers, storage owners are being extra meticulous in social distancing and the hygiene of our facilities. Most owners are staying open with either with regular hours or somewhat reduced operations. It is our understanding that the Department of Homeland Security has deemed self-storage as an essential service and is not mandated to close as part of the Shelter in Place orders. How individual owners handle their own particular situation in regard to late fees, lien sales, hours of operation, etc. is up to them, and we hope that owners and tenants work together to get through this difficult situation.
What we have seen in the market, so far, is:
I am confident that when we get on the other side of these crises, we will benefit from efficiencies and best practices that we now being driven to implement.
Stay safe, everyone.
Larry Goldman, CCIM
President, Kansas Self Storage Owners Association
Article by Larry Goldman, CCIM and Ben Vestal
Argus Self Storage Sales Network
Storage should continue its historically long run through 2020. On the positive side, 10 year treasury bills are well below 2% in February, 2020 and strong operating performance continues to drive both experienced investors and new players to the industry. On the negative side, overbuilding continues to be a concern in many markets, notably Kansas City. Having said that, we expect 2020 to continue traits we saw in 2019. Below are a few industry trends that will shape the self-storage investment market this year.
Stabilized deals are still the gold standard in self-storage investments. We have seen little to no cap rate expansion for stabilized deals in good markets. There is meaningful buying competition for stabilized self-storage assets today which is driving prices to near-record highs. 2020 will prove once again that stabilized self-storage deals are a very durable and constant income producer.
After exhibiting an incredible pace of growth over the last several years, the self-storage industry is showing signs of slowing to a more sustainable pace in 2020. Cap rates and values in most markets are expected to be flat and not compressing further. However we are also not anticipating any rise in cap rates as there is still worthwhile demand and bidding competition from qualified investors. However, some sellers who hold out for the final dollar will be left wondering what happened when the investment market officially turns downward. Remember, it is better to be a year too early than a day too late!
Lease Up Deals2020 will be the year of the lease up deal and we expect to see a number of deals in lease up coming to market. Many developments around the country that opened in the last 6-24 months are not achieving the rental rates they projected. In many markets rental rates are off by as much as 20%-30% and this, along with slower than anticipated absorption, is beginning to cause concern for some owner/developers. This is compounded by the rising real estate taxes and rise in operating expenses that self-storage properties are getting hit with in many markets around the country.
Most of the new self-storage projects that have been built this cycle are multi-story and located in major markets with strong population and job growth. These projects will stabilize, but the question is when? Most self-storage developers underwrite 2-3 years to stabilization. In reality, it may take some of these new projects 5+ years to stabilize due to the large number of new projects that have been built this cycle. This puts owners who are overleveraged or undercapitalized at a meaningful disadvantage and creates opportunity for buyers with long term investment horizons. This is the biggest value-add opportunity in the industry today, but it is not for the faint of heart!
New Buyer ProfileNew buyers of storage are entering the market from other property types. Word is out that the storage sector offers excellent returns without many of drawbacks of retail, office and hospitality. While demand drive values, there is more fickleness than when storage buyers were largely experienced storage operators building scale.
New DevelopmentWe are all aware of the development boom that has occurred over the last several years in major MSAs. Interestingly, our analysis of many secondary markets shows that rental rates are higher and growing faster than the those in the major MSAs that have taken on new projects over the last 12-24 months. This has presented the opportunity for a “Back to Basics” approach to self-storage development in these secondary markets. Much like the first-generation projects that were built during the 80s and 90s, these new secondary market developments will typically pencil to a 9%+ unleveraged yield upon stabilization (85% occupied). This has also encouraged the development of RV & Boat storage deals or a hybrid of self-storage and RV & Boat.
Yield Curve Flattening (Interest Rates)The yield curve (the difference between short and long-term rates) has flattened out in recent weeks. That’s typically been a sign of slower growth ahead. The bad news is that the gap between the Two-Year and Ten-Year-Treasury yields has been inverting. Inversion is when short-term rates are higher than long-term ones, and this has occurred prior to every US recession over the past 50 years. The spread hasn’t been this narrow since just before the Great Recession.
However, when that switch is flipped, history shows that the economic prosperity doesn’t necessarily end right away. The lag between inversion and recession tends to be lengthy, ranging between 14-34 months. The last time the yield curve went upside down was 2005, a few years before the Great Recession. The recent flattening of the yield curve has created an opportunity, maybe the last opportunity, to lock in low interest rates or high sale prices in this cycle. One thing that is clear today and has been for the last 50+ years is that the value of real estate is directly tied to the cost of debt and that is what makes the game worth playing.
Meanwhile, the phone has been ringing off the hook with owners wanting to find out what their property is worth. In some cases, their interest is only curiosity, but in many cases, they are interested in financing, estate valuation or selling. Argus is now offering a Sales Comp Report that evaluates historic pricing trends. Argus has tracked and inventoried more than 1,000 self-storage sales comps for 2019 nationally and we were involved in more than 100 transactions nationwide in 2019, which puts us in a unique position to advise our clients. If you would like to receive this free report, please let us know.
Larry Goldman, CCIM, is the Arkansas/ Kansas/ Missouri affiliate of the Argus Self Storage Sales Network, as well as the President of the Kansas Self Storage Owners Association. Larry can be reached at 913/707-9030, at email@example.com
Ben Vestal, President of the Argus Self Storage Sales Network, can be reached at 800-557-8673 or firstname.lastname@example.org
Article by Scott I. Zucker, Esq.
Self Storage Legal Network
The self storage industry is well known for its fees, be it invoice fees, late fees, overlock fees, inventory fees, lien fees or sale fees. But more and more, these types of fees have fallen under the scrutiny of consumers who claim that the fees are unreasonable or even illegal. Over the last decade, the national Self Storage Association, together with affiliated state Self Storage Associations, has taken a giant step to statutorily create late fee "safe-harbors" so that self-storage facilities can charge late fees arising from delinquent rent payments without the risk of consumer litigation. Most of these late fee laws have resulted in operators being able to charge a reasonable late fee for non-payment in the amount of $20 or 20% of the monthly rental rate, whichever is higher. Some states have gone higher with their legal approvals, some lower.
But the same scrutiny that was applied to late fees is being turned to other types of fees that are charged by self storage operators in conducting their business. The first arises from the charging of a convenience fee or a surcharge to customers who pay by credit card rather than by cash or check.
A convenience fee is generally considered a fee charged to a customer who opts for the convenience factor of paying by credit card. This fee is meant to supplement the cost of the merchant in having a credit card system itself (cost of hardware and software to manage a credit card payment system). A convenience fee is best charged as a flat fee and not one tied to the amount of the charge itself. Again, this convenience fee is being added to the customer's payment to cover the additional cost to the merchant for having the credit card system available to its customers for ease of payments.
A credit card "surcharge" is defined differently from a convenience fee. A surcharge is commonly seen as a way to cover the fee charged by the credit card company itself to process the charge. For example, if a tenant pays its rent using a Visa Credit card, that credit card company will charge the operator a fee (upwards of 3-4%) to "process the payment". Therefore, in order to avoid losing that 3-4% revenue, the operator will turn around and add a surcharge to that customer's payment to cover that expense. This additional charge is seen as a surcharge for the use of the credit card for payment. Under a settlement agreement reached in a large class action against a number of credit card companies, merchants can typically pass along a charge EQUAL to what they must pay the card processor, or up to four (4) percent.
There are a few states that still prohibit any surcharge to customers using credit cards. Those states include Colorado, Connecticut, Kansas, Massachusetts and Oklahoma. There are also a few states where the "no-surcharge" laws have been tested in the courts and found to be unconstitutional, such as in California, Florida and Texas. In New York, the courts recently held that surcharges were legal ONLY IF properly disclosed to the customer in advance of the charge. New York, like Maine, requires that a merchant post both the cost of paying with cash and the cost of paying with a card.
One of the more recent challenges that has appeared is the legality of charging a fee to customers who opt for a paper invoice and who choose to pay by check rather than credit card. As more and more businesses work to shift their payment processing to only credit cards (or other electronic payment options), those businesses are seeking to disincentivize their customers who ask for a paper invoice or who choose to still make payments by check. This issue was examined in a recent class action lawsuit brought against State Farm Insurance. In the State Farm case, the plaintiffs allege that State Farm's practice of charging its insurance customers an extra fee to send them a paper bill, as opposed to an on-line bill, is a violation of New York law. The contention is that, based on a New York law passed in 2011, merchants are prohibited from assessing service fees against customers receiving paper bills or even making payment by mail. The law was apparently created to avoid a disproportionate penalty against customers who are senior citizens or those with low incomes or who are otherwise unable to access a computer for payment.
Scott Zucker is a partner in the law firm of Weissmann Zucker Euster Morochnik & Garber P.C. in Atlanta, Georgia. Scott specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. Scott is a frequent lecturer at national conventions and is the author of Legal Topics in Self Storage: A Sourcebook for Owners and Managers. He is also a partner in the Self Storage Legal Network, a subscription-based legal service for self storage owners and managers. Scott can be reached at 404-364-4626 or at email@example.com.
Over the last five years, as the use of technology has blossomed in the self-storage industry, more and more self storage facilities have shifted to unmanned properties, utilizing the opportunities for kiosk services and now even mobile leasing with electronic contracts. All of this has been great for both operators and tenants, making their access to renting easier and more efficient. But one unique but consistent element of these unmanned properties, using all of this technology, is that these systems use credit card processing rather than cash to obtain payment from the tenants.
Initially, establishing the use of a credit card as a "condition of tenancy" was accepted and not challenged. But recently, with a flood of state legislation, self-storage properties that are limited to credit card payment processing may be facing fines and ever greater liability for not allowing their tenants who want, or otherwise don't have access to credit, to pay in cash.
Three states have recently enacted "cash" laws that provide that retail establishments (arguably including self storage facilities) must accept cash payments from their tenants. These "Discrimination against Cash Buyers" laws provide that retail establishments "offering goods and services for sale" must accept legal tender when offered as payment by the buyer. Such laws were recently passed in Massachusetts, New Jersey and Pennsylvania. The Pennsylvania law goes so far as to state that it was unlawful for any person to "refuse to rent or sell property or services to any individual for the reason that the individual does not possess a credit card." Such "cash laws" are also popping up in local jurisdictions and can be found in new city ordinances such as one recently passed in San Francisco where the law explains that "Millions of Americans do not hold bank accounts or otherwise fall outside the non-cash financial system" referencing that "17% of all African-American households and 14% of all Latino households in the U.S. had no bank account". As such, the law seeks to protect citizens of San Francisco who are limited to the use of physical cash as payment for goods and services. The law additionally places a restriction on charging any additional fees for those customers that choose to use cash.
These laws will have a direct and significant impact on the developing growth of unmanned facilities that rely on credit card processing for their payments and further for those facilities that have elected to make the use of a credit card a "condition" for tenancy. It appears, as these new laws indicate, that notwithstanding the practical application of credit card use for self-storage rentals that more pressure may arise against self storage owners to provide for a cash payment option.
How will this affect storage facilities that don't have a physical office, but otherwise operate a "brick and mortar" rental facility? These current laws do not address those unique circumstances at all. As such, these laws may end up being tested in situations where a cash paying tenant complains that the unmanned facility, using only a kiosk or virtual/on-line payment system, is alleged to be in violation of the law, even though they do not have a brick and mortar office where rentals can be transacted.
Facilities with live managers will definitely need to reconsider any restrictions they might currently have against operating with cash. A manned facility conducting rentals with live managers may not have any choice but to accept cash as an alternative to credit cards based on the language of these new laws and the pressure being mounted against retail businesses that suggest that denying cash customers is another form of economic discrimination.
The question of whether an employer can restrict their employees from bringing guns into the workplace has continued to be a challenging issue around the country, especially as we experience more workplace violence incidents. Like other businesses, operators of self storage facilities similarly address the question of how to handle this issue on their properties.
As the questions have circulated, numerous states have enacted their own laws to address this issue in order to provide guidance to employers who are anxious to create safe workplaces for their employees. The states have enacted these laws because there is no federal law that regulates guns in the workplace.
Here are a few of the more common questions that arise on this topic:
Can an employer restrict their employees from bringing guns into the workplace even if the employee has a concealed carry license?
Generally, yes. If the policy is expressed in an employee handbook or otherwise posted, the violation of the policy can result in the termination of an "at-will" employee. No states have created a right for an employee to possess a firearm in the workplace. The general point of view on this issue relates to the employer's duty to create a safe work environment. The prevailing belief is that allowing guns in the workplace may otherwise subject an employer to liability if an employee is injured by a gun allowed on business premises.
Can an employee store their weapon in their car at work?
Based on state law, employees are generally allowed to store their weapons in a locked private vehicle in the business's parking lot, even if the employer owns the lot. These "guns in trunks" or "parking lot" laws allow employees to store guns in their personal vehicles but require that the firearm be lawfully possessed by the employee, concealed from view and locked in the trunk or glovebox of the vehicle. The states that have these parking lot laws include Alabama, Alaska, Arizona, Arkansas, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Nebraska, North Dakota, Tennessee, Texas, Utah and Wisconsin.
Are there other state laws that impact guns at work?
Interestingly, there are a number of gun laws in place around the country that impact both the employer's and employee's rights concerning gun possession. For example, some states do give employers the right to forbid firearms on ANY company property, including their parking lots, whereas other states like Ohio, Texas and West Virginia have passed laws prohibiting employers from forbidding the storage of a firearm in a locked vehicle.
Some states like Florida prohibit employers from searching employees' cars for firearms. However other states, like Georgia, allow an employer to search an employee's vehicle if the "situation would lead a reasonable person to believe that accessing the vehicle is necessary to prevent immediate threat to human health, life or safety".
What about employer's rights relating to an employee's gun ownership?
It is a constitutional right to own a gun or to carry it if properly licensed. As such, although employers do have the right to control their workplace and, in some instances, their parking lots, typically employers cannot make hiring and firing decisions based solely on whether the applicant or employee owns a gun or has a carry permit, assuming the applicant or employee does not violate any company policies in the workplace. In fact, Indiana Code 34-28-8-6(c) prevents employers from terminating or refusing to hire employees based on gun ownership.
The best answer to many of these questions is for employers to check their state laws and apply those laws and their company policies, via proper notice, to their employees so that the employees know their rights as well as their responsibilities when it comes to guns in the workplace.
Law enforcement commonly describes certain red flags for self storage operators that might suggest criminal activity occurring at their facility. As it relates to drugs, operators are told to inspect their dumpsters for signs of used needles, discolored soda bottles, remnants of chemicals as well as any other materials that might suggest drug manufacturing or use inside of rented units. Additionally, operators are warned to observe certain behaviors such as off-hour access, rent payments in cash, and unusual use or traffic in or near the rented units. But what is a self storage operator supposed to do when they observe such behavior or find tangible evidence indicating potential criminal activity? Basically the adage of "see something, say something" applies to self storage as it does to other businesses. An operator who believes that criminal activity is occurring at its facility does not assume any liability by contacting local law enforcement to request their assistance in investigating the suspicious activity. The fear and hesitation of getting involved and "pointing the finger" at a particular tenant must be outweighed by the greater risk that, without any intervention, the tenant's actions may ultimately result in harm to others and, possibly, damage to the facility itself.
Operators are counseled to notify police to investigate when they have observed consistent suspicious activity (more than one incident or general curiosity). As part of that investigation, the operator may be asked to provide the name and unit number of the particular tenant. The operator is permitted to provide that information since the "rent roll", which contains that information, is the property of the operator and can be shared with others. However, a request to review the tenant's file, which contains personal information regarding the tenant (address, phone number, social security number, credit card information) should only be turned over to law enforcement in response to a written subpoena for the information.
Additionally, when asked to "open the unit", the operator must explain to law enforcement that, as long as the rent is current, the rented unit is not under the "care, custody or control" of the facility and the police would need to obtain a search warrant to enter the space (unless the police identify sufficient exigent or emergency circumstances which may permit their entry into the space without such a warrant). However, if a unit is in default and the operator has begun processing their lien over the stored property (including having cut the lock for their inspection), the facility now has a statutory right to enter the unit and may permit law enforcement to view the unit as well, since the tenant's right of privacy was waived once they allowed their unit to go into lien.
Operators will often ask, "Can I notify the tenant that the police are investigating their unit or have inspected their unit?" The answer will depend on the instructions from law enforcement. If the police are involved in a larger surveillance of the facility and the unit in the hopes of capturing the tenant when they arrive or to verify the suspected criminal activity, then the police might ask the operator not to notify the tenant. But other times, especially if the investigation does not result in a prosecution, the police may permit the operator to contact the tenant regarding the investigation.
At the end of the day, it is recommended that self storage operators put forth the effort to introduce themselves to their local law enforcement and seek to create an open line of communication regarding the activities at their facility. That way, if there is suspicious activity, they can reach out to a friendly contact to seek support and protection. Such a relationship is extremely important, including circumstances where the facility may suffer a break-in and needs a police report or where a disgruntled tenant makes physical threats against the operator. In those situations it's always nice to have a number to call for help.
Article by Live Oak Bank
Are you considering the purchase or acquisition of a self-storage facility? We recently interviewed Self-Storage Expert, Jim Chiswell, and got his thoughts on feasibility studies, squashing competition, self-storage ownership and more. Read our interview below.
Q: What do you need to take into consideration before you conduct a feasibility study?
A: The comment that I have repeated many times over the years to potential clients is “Do Your Homework.” I am always surprised when I start talking to someone, and they have no idea how much competition they have in the target market area or how the land they are considering is zoned. The increasingly competitive marketplace makes “Homework – Homework – Homework” the mantra for everyone thinking about getting into the business now.
Q: Is there a healthy amount of competition when it comes to opening a new facility in a popular area?
A: I have always felt the best competition is zero. I can still remember the days working on locations where the closest competition was 15 or 20 miles away. Not so today.
When it comes to self-storage ownership, you must look at competition both on a quantitative as well as qualitative level.
I can tell you from my office in Virginia how much gross square footage there is with a given market area. What I can’t tell you is the quality of those facilities. What amenities are the individual facilities providing? Temperature controlled units? On-site management? State-of-the-art security? Deferred Maintenance? Curb Appeal? Ease of ingress and egress? All of these factors and many more could point to a market opportunity for a new first-class facility despite what the mathematical Supply / Demand Gap shows.
Q: How do you determine your target market area?
A: People subconsciously define their “Convenience Market” with the following data points: Where They Live – Where They Work – Where They Shop /Dine – Where Their Children Go to School and Where They Go to Church. You may have a site that is actually closer to where they live, for example, but if they never drive in that direction for any of the items above, they just don’t consider it “in their market”.
So that site, in the back of an industrial park backing up to the Interstate, with 80,000 vehicles per day going by at 65-70 MPH and no exit within 10 to 15 miles in either direction is basically totally useless for the marketing of the business. I would much rather have frontage on a local street with 7,500 to 15,000 vehicles per day going by my facility because the majority are local folks and therefore potential customers.
Q: Financials: Where do you begin?
A: Self-Storage financials are built around the ultimate Unit Mix. Yes, you will generate additional income from administrative fees, late fees, product sales, truck rentals and customers’ goods insurance, but it is renting units that is the bulk of our income.
I have always felt that designing a Unit Mix is much more an art form than a science. However, I must comment that the power of an Excel spreadsheet to allow you to do “What If – What If” projections can get you into trouble. The financial projections of a 45,000 net rentable square foot facility with an average unit size of 85 square feet will look totally different than the same square footage if the average unit size is 115 square feet. The traditional “Banker’s Unit Mix” is one that looks great on paper, but if the hundreds of small units you have projected don’t rent, the Net Operating Income disappears really quickly.
Q: What’s are your thoughts on marketing a facility? Any tips from an expert?
A: I have been telling clients for years that consideration of the Management and Marketing of a new facility needs to start the same day you get your building permit. I still drive by new facilities across the country that are under construction without a single Coming Soon sign on the highway and no website established.
It is only when you start renting units that you start making any revenue. Don’t wait until 30 days before you get your Certificate of Occupancy to start to think about your marketing and management strategies for the business.
The internet has become increasingly important in the marketing of our facilities.
Yet, the 2017 Self Storage Demand Study once again pointed out that the number one reason storage customers give to answer the question “Why did you pick the location you are using?” was “Seeing It Driving By.” An investment in the curb appeal of the facility could be the best marketing money spent.
I always encourage my clients to create a strong Customer Referral Bonus Program from the beginning. Unlike some people, I don’t like using the bonus to reduce people’s next month’s rent. I have always felt that seeing the reward in their hand helps to reinforce the benefit that they are receiving, so I would much rather give a $25 Visa gift card than $25 off next month’s rent. You can also give people the option of several incentives: money gift card / restaurant voucher / Starbucks gift card etc.
Just remember your thinking about Marketing and Managing the facility must start the day you get your building permit.
Jim Chiswell has held a career in the self-storage industry extending for over 35 years. He launched his self-storage consulting firm in July 1990 after working at Sovran Self Storage (now Life Storage). Jim's firm provides Feasibility and Acquisition Due Diligence services from coast-to-coast. In addition, he works with a group of clients annually as a coach for both owners and their managers. A frequent speaker at both national and state industry conferences, Jim also contributes articles to both the Inside Self-Storage and Mini Storage Messenger magazines.
Article by Ben Vestal
Argus Self Storage Sales Network
As investors are enjoying the fluid nature of today’s transaction market, it has become evident that buyers and sellers may need to focus on more than just purchase price. We are in an incredible period for the self-storage industry where the unconventional and unexpected have become a part of everyday business. The influx and sheer amount of buyers/equity in the self-storage space over the last few years has led to higher transaction velocity, higher values and has, much to my surprise, extended the self-storage investment cycle with very little signs of slowing down.
As real estate investment brokers, we sometimes forget that our world of day-to-day real estate transactions is quite unfamiliar to our clients when they decide to buy or sell a self-storage property. With this in mind, I thought I would take you through some of the less obvious parts of today’s self-storage transactions and explain not only the activity but also the associated strategy.
Deal Structure: If you are in the market as a buyer or seller of a self-storage property, it is important to understand that the structure of the deal can be as important as the purchase price. With very sophisticated capital continuing to enter the market and values continuing to remain high, alternative structures are becoming more and more common. Too often the buyer and seller only focus on the purchase price and glaze over the structure without considering the financial implication of the structure. We have advised our clients on many deal structures that include UpReits (OP Units), preferred equity structures, and price allocations, just to name a few. These all allow a buyer or seller to achieve different goals and it can be very beneficial financially if you understand the structure. But, as always, the devil is in the details. It is important to remember that each buyer and seller’s situation is unique, so please seek tax and legal advice from an experienced deal lawyer and accountant.
Deal Pricing: Today’s very fluid market has made it difficult for even the most sophisticated investment broker, and nearly impossible for a local investor, to pinpoint the exact value of a self-storage investment. Oftentimes our clients are thinking about a price that would make them ecstatically “happy” and not the price at which someone would actually buy the property. In the world of real estate transactions, the market usually has a relatively narrow band of market value. However, today’s unique self-storage investment market has led us to a much wider band of market values.
It is not uncommon in today’s investment market for offers on a $10,000,000 self-storage listing to be several million dollars apart (10%-25%). It is important to remember that overpricing is NOT harmless! You must diligently and carefully analyze the value of a self-storage project. You should consider the traditional valuation techniques such as market sales comps, price per square foot, impact of new development, embedded value and the income approach. In addition, you must also have a good feel for the national self-storage investment sentiment and trends. We are seeing more and more national and regional buyers expanding to secondary and tertiary markets, where there has been far less new development. This has driven prices up in smaller markets while the valuations in major markets are flat or softening. Keep in mind that you should not be misled to believe your secondary market property is a 5% cap deal. We are seeing secondary market deals in the 6%-8% cap rate range and major markets in the 5.5%-7.5% cap rate range. These cap rates assume market rate operating expenses for underwriting; i.e. payroll, offsite management fee, adverting, R&M, etc. Secondary markets may not get the same respect as major markets, but it is clear that in this cycle that is
where the smart money is going.
Marketing: When taking a property to market, it is important to note that the difference in quality and risk are often very subjective. For example, a relatively low occupancy might indicate a poor performing property, or alternatively, a great opportunity to increase occupancy and revenues. For this reason, it is extremely important to broadly market properties to find the buyer who has the most optimistic view of not only your property but of the investment market today. Always beware of the broker or colleague that says “I have the right buyer for you. We don’t need to market the property.” In order to maximize your value, you are looking for the buyer who is qualified and sees the opportunity to improve your property. The more qualified prospects who are exposed to your property the better chance you have of maximizing your sales price.
In order to maximize your value when selling your property today, you must hire an investment sales broker who has experience and national reach! When considering a sale, you would be well-served to focus on how your broker will structure the deal and market the property and focus less on the price. MM-IV
Ben Vestal is the President of the Argus Self Storage Sales Network, Inc., the nation’s premier brokerage network for self-storage facilities, and has been actively involved with the management and growth of the company. He has been involved in over $1 Billion in self-storage transactions and is frequently asked to share his specialized expertise at self-storage industry conventions and meetings.
2017 was a pivotal year for the Kansas Self Storage Owners Association. We dealt with key legislative issues facing the storage industry. We urge all members to development relationships with their representatives in Topeka, as these issues are enormously significant to our industry.
Limited Lines Insurance: KSSOA assisted the Self Storage Association in the passage of the Limited Lines legislation that clarifies the storage owner’s role selling low cost Limited Lines Insurance
Sales Tax: The threat of the repeal of the sales tax exemption was present in both 2017 and as recently as a month ago in March, 2018. KSSOA is very concerned about the imposition of sales tax on self storage, setting a precedent that could carry over to other property types, while our property taxes are already significantly higher than our neighboring, peer states.
Property Tax Reclassification: Several of the KSSOA member engaged Jerry Chatam & Associates to convince the State to reclassify storage to reflect the profile of tenant, which more often than not is a residential consumer. While unsuccessful in 2017, the potential to correct the classification will remain an issue to be addressed in 2018.
In September, we added an off cycle lunch meeting to promote our mission to prospective members in the Manhattan/Junction City area, for an excellent presentation of “going back to the basics” of an excellent presentation of best practices by Brian Byrd.
We have set dates for our three general membership meetings and hope that you can attend in the meeting in the location most convenient you and help us spread the word to your colleagues in the industry.
Please help us grow so we can enhance our services to all storage owners throughout the state.
We look forward to seeing you in Leawood in May.
Larry Goldman, CCIMPresident, Kansas Self Storage Owners Association
Voicemail: (785) 380-8886
Kansas Self Storage Owners Assoc. P.O. Box #7624 Overland Park, KS 66207
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The Kansas Self Storage Owners Association is a not-for-profit tax-exempt organization under Section 501-c-6 of the Internal Revenue Code.